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Hans Sennholz: The dollar''s questionable future
By Ted Butler
InvestmentRarities.com
Tuesday, January 11, 2005
Repetitive, that's one word. Another is manipulative.
I'm talking about the price action in silver (and gold). Once
again,
significant price movements were dictated by the trading tango
between mechanical technical funds and the New York dealers. This is
what moves the markets. In the short to intermediate term, it is the
only thing that moves the markets.
Specifically, the dumping of thousands of contracts by the tech funds
on the COMEX caused the latest drop in gold and silver prices.
Certainly, nothing changed in the real world of metals that justified
the price movements, just paper trading on the COMEX. Nothing new
here.
Also, there is nothing new in the lack of reaction by government
regulators, Exchange officials or silver mining CEOs, who all pretend
nothing is wrong with pricing being controlled by speculators. As I
said; repetitive.
But it would be wrong if you thought I was complaining.
In fact, I'm ecstatic. The good news, of course, is that the
dealers
have been covering short positions aggressively. This, alone, is
great cause for optimism about eventual higher prices. When the
dealers have covered their short positions in silver, the risk is
removed. I think we're there.
The latest Commitment of Traders (COT) report is revealing. First,
there was massive, massive liquidation in gold by the technical
funds, with commensurate dealer short covering. More importantly, the
massive liquidation continued in earnest from the Tuesday cutoff. I
would estimate that we now have much less of a tech fund long and
dealer short position in gold, than we had at the bottom in
September, when gold was at $400.
From the top, I would estimate that the funds have liquidated 100,000
long gold COMEX contracts, with a big chunk coming in the current
reporting week and the three trading days from the cutoff. It should
be clear to you that this is what foretold and caused the almost $40
decline in gold from the top. That there are still gold promoters
that don't see this, or refuse to see it, is stunning.
This selloff should have been no surprise to anyone paying attention.
On the positive side, gold should be cleaned out, or close to cleaned
out, to the downside. In silver, there was an unexpectedly small
reduction in this week's COTs. There had been a 30,000-contract
(150,000 million ounces) reduction in the dealer net short position
in the weeks prior to this current report, and I had been expecting a
further 10,000 contract reduction in this week's report,
indicating a
major low-risk buy point. Instead, the report indicated only a 2,500-
contract reduction in the net dealer short position and no decrease
in the tech fund long position. Or more correctly, no decrease in the
non-commercial gross long category, which is where the tech funds are
classified.
So what does this mean for silver? While the report could be correct
in that the tech funds didn't get completely liquidated yet, and
we
still need to witness further tech fund selling amid lower prices, my
sense is that is not the case. Also, while it's possible there
may be
errors in the current report (we've seen that before), my sense
is
that something else has happened that is of the utmost significance
to the near term direction of silver prices.
This is obviously speculation on my part, so please treat it as such.
I think that the tech funds were completely liquidated in silver, but
the reason the latest COT report doesn't reflect that, is because
some other large (non-technically oriented) traders took their place.
I base my speculation on daily price, volume, and open interest data
for the time period covered in the report.
If my speculation is correct, it could mean that some very strong
hands have come into the silver market. This would be a sudden and
very bullish development. Accordingly, I see very little reason not
to embrace a full bullish tilt toward silver. This is another mother
buy point, maybe The Buy Point.
If you still have any doubt as to what really moves the silver
market, I invite you to reread prior articles to grasp this
Commitment of Traders market structure phenomenon.
If you're short on time, just start with skimming the articles
describing the previous major lows in gold and silver in September,
staring with, "The Setup?" when the dealers had a relatively small
short position. This market structure allowed the resultant $60 price
rally in gold and an almost $2 rally in silver, which were ultimately
capped and reversed with historic dealer scale-up short selling.
As happy as I am to be presented with another one of those "dimes to
the downside, dollars to the upside" buy points, there is something
even more compelling about the current set-up.
It's hard to pinpoint it, but there seems to be a confluence of
factors suggesting that this silver buy point will be the "big one."
The one that will make history. For one thing, there is a widespread
tightness in all mineral commodities, thanks particularly to China,
that just doesn't seem to be going away. Inventories of all the
industrial metals continue to drop, some, like copper, to alarmingly
low levels. In addition in copper, the COMEX delivery situation still
appears critical. I get the feeling the exchange just barely made it
through the December copper delivery process by the skin of its
teeth, with behind-the-scenes jawboning and private workouts. The
COMEX will be lucky if it can make it through the next few months
without a copper delivery problem, in my opinion. I keep mentioning
this, as a delivery problem in COMEX copper may quickly shine the
light on COMEX silver, given that COMEX silver has the largest naked
short position in commodity history; a clear invitation to an
eventual delivery problem, for a commodity in a structural deficit.
Further, actual silver deliveries to investors are still being
delayed. The Central Fund of Canada will not be getting the silver it
purchased a couple of months ago any time soon, and I have even heard
reports that the other big Canadian institutional investor still
hasn't received all the silver it has been waiting for since
early
last summer. Remember, delivery delays are a symptom of shortage.
While I can't substantiate it, I get the feeling that dealers are
delivering silver to industrial users, ahead of investors, to prevent
problems from surfacing. Sort of like emergency room triage.
Silver Eagle sales for 2004 were strong, at over 9.6 million ounces,
making it the 2nd best year in the past 15, and 3rd best since the
program began. All told, when you add in Proof Eagles and other coins
and all the commemorative issues by the US Mint, the government is
buying a million ounces of silver a month on the open market. This
demand should remain strong as far as the eye can see; or at least
until a price emergency occurs in silver.
One final note -- the gold exchange traded fund, GLD, has seen some
impressive real gold accumulation on the gold price swoon, adding one
million ounces in a few days. Coupled with the drastically improved
COTs, gold could be set for an impressive bounce. As I've said
before,
if there was no such thing as silver, gold would be an attraction for
me, particularly now. But with the COTs set up as I believe in
silver, plus the always-improving fundamentals, why go fishing when
you can shoot fish in a barrel?
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Ted Butler silver commentary archive:
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